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Key takeaways

Rising stock prices may have caused your mix of investments to change.

You should review your plan to make sure your mix makes sense.

Periodically rebalance to keep your risk level on track.

The past 9+ years have been very good to investors in the US stock market, with the S&P 500® Index climbing from 675 in March 2009 to more than 2,900 through August 2018. But amid the positive returns, it is worth taking a look at one of the unintended consequences of a strong market rally—the rise in stock prices may have added unintended risk to your portfolio.

The returns of US stocks during the long bull market have outpaced foreign stock markets, bonds, and cash. Consequently, you now may have more of your portfolio in US stocks than is ideal for your financial situation, time horizon, and risk tolerance.

While overweighting US stocks would have actually been the smart move in recent years, it may warrant a close review now. This is because, historically, a portfolio with a larger proportion of stocks experiences bigger price swings than a more conservative mix of investments. Bonds and cash may have lagged in recent years, but they have the potential to help a portfolio during downturns, as they did in 2008.

For instance, consider a hypothetical growth portfolio in 2008 with about 70% stocks, 25% bonds, and 5% cash. Based on index returns, it would have lost about 24%: a $200,000 portfolio would have lost about $47,700 dollars. Compare that to a more aggressive portfolio with about 85% stocks. That portfolio would have lost a little more than 30%: $60,500 from a $200,000 portfolio.

"The choices you make about your mix of stocks, bonds, and cash should be based on your personal situation, goals, risk tolerance, and timeline, and you should maintain that asset mix through the ups and downs of the market," explains Ann Dowd, CFP®, a vice president at Fidelity. "Just setting that mix isn't enough. To reap the benefits of your plan, you need to revisit your investments as the market moves and your situation changes. If you haven't rebalanced your portfolio over the last few years, you may be surprised at how much additional risk you are now taking on."

Higher markets and risk levels

Source: Strategic Advisers and Morningstar/Ibbotson Associates. Hypothetical value of assets held in untaxed portfolios invested in US stocks, bonds, or short-term investments. Actual historical data was used to compute the growth of $100 invested in these portfolios for the period ending in December 2017. Stocks, bonds, and short-term investments are represented by total returns of the total returns of the S&P 500 Index from 1/1926 - 1/1987; Dow Jones Total Market from 2/1987 - 12/2017, US Intermediate -Term Government Bond Index from 1/1926 - 1/1976; Barclays Aggregate Bond from 2/1976 - 12/2017, and 30-Day T-Bills. Inflation is represented by the Consumer Price Index. Numbers are rounded for simplicity. Past performance is no guarantee of future results.

Let's say the last time you decided to rebalance your portfolio was during the bear market in January 2009. Since then, the relative performance of different asset classes will have made some big changes to the investment mix. The hypothetical portfolio depicted in the pie charts shows how US stocks went from 49% of the portfolio to 67%, while the proportion of bonds was cut by more than a third.

The challenge for investors is that history suggests that more stocks come with more risk. By December 2017, the portfolio would have had a risk level roughly 18% greater than the starting mix in 2009. (To measure risk, we use annualized standard deviation of index returns; see the disclosure at the end of this article for more details.)

"If you do have more risk than your situation warrants, that could be a recipe for trouble if stock market volatility increases," says Dowd. "The level of stocks in your portfolio is a decision that should be the result of your planning process, not just left to the returns of stock markets."

Inaction led to more risk

This chart is for illustrative purposes only. The chart depicts observed historical risk based on the performance of broad diversified indexes named in the disclosure for the pie graphs above. A portfolio that is not diversified within asset classes may experience different levels of risk. See the disclosure at the end of this article for risk definition.

The case for a periodic investment review

Rather than let your investments drift with market movements, it may make more sense to rebalance your holdings periodically (say, once or twice a year) or when your mix drifts a set amount from your target. (For example, you might allow your mix to fluctuate a maximum of 10 percentage points above or below the level of your target asset mix.)

If you need to make a change, you can trade out of one holding and move money into another, but be sure to consider the effect of transaction charges and taxes before making any changes. Another approach is to target future contributions to your portfolio to bring your mix back in line with your plan: If your portfolio has tilted too far toward stocks, consider directing more of your next contributions to your investment portfolio toward bonds or cash.

Along with rebalancing, you will want to make sure that the mix you are using reflects your current goals and situation. So at least once a year, or in the event of a major change in your life—such as the birth of a child, divorce, inheritance, retirement, or job change—you should sit down and revisit your investment plan. It also makes sense to review your individual stock and mutual fund holdings at this time, as well as other financial plans.

"An investment portfolio takes some routine maintenance to stay on track," says Dowd. "When everything seems to be going well, it's still worth taking a moment to make sure you are ready for the day when things aren't."

Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

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This information is intended to be educational and is not tailored to the investment needs of any specific investor.

About portfolio risk: Portfolio risk is measured using standard deviation, which is a statistical measure of how much a return varies over an extended period of time. The more variable the returns, the larger the standard deviations. Investors may examine historical standard deviation in conjunction with historical returns to decide whether an investment’s volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility. Standard deviation does not indicate how an investment actually performed, but it does indicate the volatility of its returns over time. Standard deviation is annualized. The returns used for this calculation are not load adjusted.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for investments that focus on a single country or region.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Indexes are unmanaged. It is not possible to invest directly in an index.

The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. S&P 500 is a registered service mark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates.

The Barclays US Intermediate Government Bond Index is a market value–weighted index of US government fixed-rate debt issues with maturities from one to 10 years.

The Ibbotson Associates SBBI 30 Day T-Bill Total Return Index is an index that reflects U.S. Treasury bill returns. Data from the Wall Street Journal are used for 1977–present; the CRSP US Government Bond File is the source from 1926 to 1976. Each month, a one-bill portfolio containing the shortest-term bill having not less than one month to maturity is constructed.

The Barclays US Aggregate Bond Index is a market value–weighted index of investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of one year or more.

The MSCI® EAFE® (Europe, Australasia, Far East) Index is a market capitalization–weighted index that is designed to measure the investable equity market performance for global investors in developed markets, excluding the United States and Canada.

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